Severe and prolonged health impairment, whether mental or physical, can be debilitating and can seriously affect the individual’s activities of daily iiving. Canada’s income tax system has a specifically designed non-refundable tax credit that provides financial support to severely disabled individuals. In 2011, the federal government’s cost of providing this credit was projected to be $665 million, with the provincial governments spending approximately an additional 50%.
The determination of whether an individual’s medical impairment meets the qualifying criteria for the tax credit involves the completion of a form by the individual (or his or her legal representative) and the individual’s medical practitioner, who is obligated to disclose information about the individual’s condition. The objective is to enable the Canada Revenue Agency (CRA) to determine whether the impacted individual has a severe and prolonged impairment that meets specific conditions.
To qualify, the individual’s impairment must be “prolonged”, which generally means the impairment is expected to last for a continuous period of at least 12 months.
The severity of disability is measured in terms of restrictions in the “activities of daily living”, as defined under the Income Tax Act. In general terms, the assessment considers how markedly restricted an individual is in one of the basic activities of daily living, or whether he or she is significantly restricted in two or more of the activities. The activities of daily living typically include:
- Seeing – either blind or vision in both eyes is 20/200 or less with the use of corrective lenses or medication
- Speaking – unable or taking an inordinate amount of time to speak so as to be understood by another person in a quiet setting, even with the aid of appropriate devices
- Hearing – unable or taking an inordinate amount of time to hear so as to understand another person in a quiet setting, even with the aid of appropriate devices
- Walking – unable or taking an inordinate amount of time to walk even with the aid of appropriate devices
- Eliminating – unable or taking an inordinate amount of time to eliminate
- Feeding – unable or taking an inordinate amount of time to feed
- Dressing – unable or taking an inordinate amount of time to dress
- Does not have the mental functions necessary for everyday living
- Requires life-sustaining therapy to support a vital function
It should be noted that individuals must first have availed themselves of appropriate therapy, medication and devices before being able to claim the non-refundable disability tax credit.
The disability tax credit is a non-refundable tax credit that reduces the taxpayer’s income tax liability. To the extent the disabled taxpayer cannot use all of the non-refundable disability tax credit to reduce his or her income tax liability to zero, the individual may be eligible to transfer the credit to a spouse, common-law partner or supporting individual based on specific criteria.
The completed application form for the tax credit can be submitted to the CRA at any time. If the form is approved with an effective date prior to the immediate tax year, an automatic reassessment is processed and historical returns are generally updated to reflect new information.
If an application is declined, the CRA will send a notice of determination that explains why the application was denied. The CRA may reconsider if new information becomes available that was not considered in the initial assessment. The taxpayer has the right to appeal the CRA’s denial by filing a formal objection to the decision. It is important to keep in mind that there is a 90-day time limit to object after the CRA mails the notice of determination.
Approval of the application results in a disability tax credit certificate that allows the individual to claim the non-refundable tax credit in subsequent years without the need for an annual application. However, the taxpayer is obligated to inform the CRA if his or her condition improves, and the CRA has the right to request that the taxpayer reapply for the disability tax credit certificate.
Qualification for the non-refundable disability tax credit can occur suddenly. It is important to be aware of the credit and be vigilant about ensuring the certificate is in place as soon as possible.
E.O. & E.
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Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.